dishonest seller

We saw a house for sale by owner, the owner showed it to us ,and we decided to buy it.She was moving out so we moved in and rented it from her while its in escrow.Now my broker calls and says your loans been approved, lets get this closed. Now we find out the lady hasen't signed any of the escrow instructions she had been sent,so the only purchase aggreement we have is hand written and signed by her on the back of my rental aggreement. we then fond out she listed the house without her ex husbands knowledge. He says he can't sign a deed or any paperwork on the house at all because he filed bankruptcy and surrendered the house to the court.The broker now tells me the house is in serious forclosure, no payments have been made for over 6 months. The owner that rented to us says if we still pay her the rent she will sign the escrow papers, but our broker says she can't legally rent a house in forclosure if she's not making payments to the mortgage co. and that we should put the $750.00 rent into a fund to go to the mortgage co.
What should we do??

Get a lawyer. You are in way over your head, and someone has to straighten it out if you want the house. Or throw up your hands and find another place. You might be able to get the broker and sellers to pay for your lawyer's bills to avoid getting dragged further into this mess and risk suit from you.